Specialist Foreign Currency dealers Moneycorp report Sterling started last week at the psychologically important $2 level. It was not until Thursday that investors made up their minds to take it higher against the ailing Dollar. By this Monday's London opening it had recovered to $2.0250.

The Dollar added another week of underperformance to the four that preceded it. The woes of the US residential property market were underlined when the National Association of Home Builders' Index hit a record low of 20 on its 0-100 scale. Housing Starts and Building Permits in August ran at their slowest speed for a dozen years.

The Federal Reserve surprised many analysts when it sliced half a percentage point from its key Funds Rate. A cut of half that size had been expected and investors realised that the Fed now sees the downside risk to economic growth as being greater than the upside risks to inflation.

Sterling struggled through the week lumbered with the millstone of Northern Rock hanging from its neck. The run on the bank had been stopped but the rumblings and mutterings about regulatory incompetence continued to undermine confidence in the system and the currency. Sterling's relatively robust performance against the shaky Dollar overstates its popularity last week: against many currencies it was a net loser.

The jury is still out on whether the Bank of England will cut its Bank Rate next week. It certainly looks as though the Bank is now more inclined to ease policy than to tighten. A no-change decision next week will not rule out the chance of a cut from 5.75 to 5.5 per cent in October or November. A big consideration for the Bank will be how it expects the UK housing market to withstand the loss of confidence that has been brought about by the Northern Rock situation. If it transpires that UK house prices have indeed peaked the Bank will be more likely to ease and Sterling will be less likely to develop its position above $2.

A base rate cut next week or next month would remove Sterling's most important prop. Buyers of the Dollar should remain hedged.

 

Source: Moneycorp